Drafting completed 11/04/2016
TAX BENEFITS SPECIFIC TO THE SYSTEM OF PROFESSIONAL RENTAL OF FURNISHED PROPERTY
Subject to meeting certain conditions (entry in the trade and companies register + gross rental income > €23,000 including taxes + revenues in excess of pensions and other household professional income), the activity of rental of furnished accommodations is eligible for several benefits :
The income is taxable in the category of industrial and commercial profits (BIC), eligible for the depreciation of buildings and movable property over their normal useful life. These accounting expenses greatly reduce the taxable rental income compared with a rental of unfurnished property;
The share of losses not derived from depreciation may be applied without limitation to other income, which may be of particular interest during the initial years when the registration fees are amortised;
Capital gains realised by a professional renter of furnished property may be eligible for an exemption if the activity is conducted for more than five years and revenues do not exceed €90,000 in the two financial years preceding the sale;
A specific exemption scheme exists for the ISF (wealth tax). However, persons already engaged in an occupation are not eligible for it in practice.
POSSIBLE COMBINATION WITH THE DUTREIL TRANSFER SCHEME
Subject to various conditions, the "Dutreil" scheme allows the securities of operational companies to be transferred by donation or succession, with the benefit of a 75% reduction on the taxable value without any liability for transfer tax. Eligible companies must conduct an industrial, commercial, craft, or agricultural activity or provide professional services.
The activity of rental of furnished property is civil in nature in private law, but from a tax point of view, with regard to income tax, it is commercial in nature since it falls within the scope of the industrial and commercial profits (BIC) scheme. Is this tax qualification enough to make securities of companies engaged in professional rental of furnished property eligible for the "Dutreil" scheme?
In this respect, the view of practitioners is shared, as the tax authorities do not explicitly authorise the application of the Dutreil scheme to the activity of professional rental of furnished property (LMP) in its comments on the "Dutreil" scheme. However, part of the doctrine considers that if hotel-related activities accompany the rental, the activity of professional rental of furnished property would likely be eligible for the "Dutreil" scheme. In practice, three of the following services should be provided: breakfast, regular cleaning of the premises, provision of linens, and receiving of customers.
In a case before the committee on tax law abuse (CADF - Opinions 2015-07 to 09 of 06.11.2015), the authorities challenge, on the grounds of abuse of rights, the operation in which taxpayers transfer properties within their private assets to a limited liability company (SARL) conducting an activity of rental of furnished property in order to then be able to transfer the shares with the benefit of the 75% reduction.
However, the authorities do not dispute the operation on the grounds of the very nature of the activity of rental of furnished property. In a note attached to the CADF's opinions, the authorities specify that they consider the activity of rental of furnished property for residential use (LMP) to be eligible for the Dutreil transfer scheme. In this case, the rental was not accompanied by services.
Hopefully this position will be taken by the authorities in its comments published in the BOFIP.
The trust and succession planning team for France is available to help you.
This document is prepared for general information purposes only and does not constitute personalised legal, tax, or accounting advice. Trust and succession planning strategies depend on your personal situation and the regulations. They must always be confirmed by legal, tax, and accounting professionals. We urge you to consult your own independent advisers. This document was prepared on the basis of information believed to be reliable at the time of its drafting, but we do not guarantee the completeness or accuracy of this information. For questions about the information contained in this document, please contact your private banker. This document is published by Edmond de Rothschild (France). It may not be reproduced or redistributed without its prior consent.